Another 'Stablecoin' Debuts: Can Asset-Backed Cryptocurrencies Ward Off Crypto Volatility?

Speculation continues to guide the now-$540 billion cryptocurrency market down a volatile path that’s seen the market climb to as high as $825 billion before tumbling to as low as $430 billion in the month of January alone.

But amid the frequent dips and peaks, there’s an emerging class of tokens that wants to upend crypto’s current reality by looking to shed its volatile image. As such, they’ve been dubbed “stablecoins.”

Despite growing adoption, crypto’s volatility makes it a risky inconvenience as a medium of exchange for day-to-day transactions and normal commerce. And as is the case with all such coins, a new stablecoin launched Wednesday, called TrueUSD, aims to provide the fast transaction speeds and global reach that draw many cryptocurrency investors to the market while providing a hedge against its volatility.

“If you’re a crypto trader and think crypto is going to crash tomorrow, you need something that you can trade into that’s going to be stable. Pretty much all cryptocurrencies today are highly volatile and highly correlated -- swapping into a stable cryptocurrency like TrueUSD means you can be in and out within seconds, minutes at most, and your fees could be measured in the cents,” says Rafael Cosman, CTO and cofounder of the San Francisco-based TrustToken team behind Wednesday’s TrueUSD launch.

TrueUSD is a USD-backed cryptocurrency with a fully collateralized underlying asset pool that's held in custody by partner banks. It, along with a growing flurry of other stablecoins, essentially allows for crypto-market entrance without immediate exposure to Bitcoin or Ether, the usual gateway coins.

[Ed. note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]

“TrueUSD is a form of tokenized U.S. dollars, one of the simplest assets you can tokenize -- dollars sitting in the bank,” says Cosman, 24. “But one of the main things that differentiates TrueUSD from alternative products is that we’ve developed a legal framework to give protection to the token holders while creating a strong link between their tokens and the underlying dollars.”

The legal framework for collateralized cryptocurrencies, developed in collaboration with Washington D.C. law firms WilmerHale and Arnold & Porter, is hinged on TrueUSD’s host platform, TrustToken, cofounded in late 2016 by Cosman, a Stanford grad who’s worked for Palantir and Google, along with Danny An and Stephen Kade. TrustToken has secured backing thus far from Stanford Start-X, New York investment firm FJ Labs and cryptocurrency hedge fund BlockTower Capital. Ari Paul, the CIO of BlockTower, says he’s seen unmet demand for a more transparent and regulatory-compliant stablecoin. He adds that TrueUSD will make it easier for BlockTower to trade cryptocurrency across exchanges.

The firm will use smart contracts to keep track of TrueUSD balances and ensure only holders who've gone through the KYC process can make deposits or withdrawals. Before rolling out the product to lower-volume parties, TrueUSD has opened to high-volume traders and exchanges. It’s yet to announce a date for the full launch.

A 'Stablecoin?'

Last week saw bouts of increased regulatory doubt drowning the crypto market in a sea of red, but there was at least one crypto asset that held onto stability.

The stablecoin price narrative is, thus, perhaps well illustrated by the price movement of Tether in the more-volatile weeks of recent. Tether is presently the largest stablecoin, one that similarly aims to track the value of a single U.S. dollar, with a fast-growing supply of tokens that has boosted the cryptocurrency’s market capitalization in recent months to more than $1.6 billion with a current 24-hour volume that’s nearly two times as large at $3.0 billion.

But, of course, the stablecoin story is not without critic or flaw. And it is one that's dependent on design.

A blog posted last week to the website of Austin crypto hedge fund Multicoin Capital outlines different approaches to designing stablecoins. The first corresponds to the model used by Tether: issuing “IOUs” -- a centralized approach that Multicoin Capital research associate Myles Snider writes can “impose serious counterparty risk on holders of the token.”

The stability of Tether's USD-pegged price was rocked in November when the firm announced in a blog post that $31 million of its "funds were improperly removed from the Tether treasury wallet through malicious action by an external attacker." Since then, heightened criticism surrounding Tether has revolved around a purported lack of transparency regarding the claim that USD reserves back Tether one to one.

Tether has responded by saying such claims are “uninformed and baseless,” and it updated on the incident last month saying that a full balance sheet audit was still underway, as of Sept. 30, 2017, by New York City accounting firm Friedman LLP. Tether currently lists assets of nearly $2.3 billion on its balance sheet. The firm reiterated the sentiment in a Wednesday statement to CoinDesk, saying "Suggestions that USDT [Tether's ticker] has no material basis have no merit. Tether is fully backed dollar for dollar."

[Update 01/31: In a statement to CoinDesk, published on Jan. 27, a Tether spokesperson confirmed that the firm's relationship with Friedman had dissolved.]

A second, more-decentralized model for stablecoins exists with those that are collateral-backed with crypto assets: the case with Maker’s Dai coin, which launched in December on the Ethereum blockchain. The currency uses algorithmic smart contracts and an Ether backing to maintain its dollar peg, but even that mechanism saw a flaw on January 10 and 11, when the price of Dai temporarily fell below 75 cents on Chinese exchange Bibox. The price, however, held up on other exchanges despite a broader cryptocurrency market crash.

Vocal crypto commentator Preston Byrne, an independent consultant and founder of blockchain tech company Monax, has been a frequent critic of the stablecoin concept, targeting such models as described above. "Crypto-collateralized stablecoins are the perpetual motion machines of modern finance,” writes Byrne on his site. “...A stablecoin that is collateralized by itself is a complex and fragile Nakamoto Scheme doomed to fail." Of a real-asset-backed alternative, Byrne writes: "A stablecoin that is collateralized by real assets and structured correctly is not a stablecoin, but a unit trust."

TrustToken, meanwhile, says it uses trust laws to offer legal protection for TrueUSD holders and has custodial accounts that are subject to regular auditing. Cosman said that the team’s not currently disclosing its banking partners.

“TrueUSD’s collateral, the actual U.S. dollars, are held in custodial accounts by FDIC-insured banks, and they’re managed by our partners who are trust companies acting as custodians of that money,” says Cosman. “Our company TrustToken is not actually holding the U.S. dollars; we just help with the blockchain connection.”

TrueUSD is part of a broader project, TrueCoin, that wants to take “asset tokenization” mainstream. Cosman says TrustToken is in the process of working with San Francisco-based Neighborly, a municipal bond market startup, to tokenize municipal bonds, and it sees other fiat currencies as natural extensions of the TrueCoin product.

“If you look at the New York Stock Exchange with a market capitalization of about $20 trillion, compared to the market cap of crypto, which is about $500 billion right now, there’s this huge difference between the two but actual trading volume is about equal, and part of that is because of how open and accessible crypto is,” Cosman says. “Bridging assets to blockchain can create a huge amount of value because the more liquid that assets are, the more valuable they are. When anyone can plug into an open protocol, it creates an unbelievably liquid ecosystem.”

I studied business journalism and economics at the University of North Carolina at Chapel Hill. At Forbes, I'm an assistant editor for money & markets. Before, I worked as a marketing & communications assistant at UNC Kenan-Flagler and spent a summer reporting on the...